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Madeline Passarelli didn't have any fantasies about the fashion
business. Cutting her sartorial teeth from a young age at her
father's apparel company, then as editor for several style
magazines, she was schooled in the less-than-glamorous aspects of
design and distribution. But one lesson in style led her into
entrepreneurship: Looking fabulous shouldn't require a small
fortune, especially when trendy threads get relegated to the back
of the closet after just one season.

Translating that principle into a profitable venture put
Passarelli on the cutting edge of an emerging industry. As
founder of the aptly named Wear Today, Gone Tomorrow, she's one of
the leaders in a nascent group of startups offering short-term
rental of luxury apparel and accessories to customers eager to
sport designer labels, not empty wallets.

Though posh party frocks make up the bulk of Wear Today's rental
assortment, a free membership (with registration) allows
customers to choose from a limited selection of designer jackets
and tops, too. Items are available in a range of sizes and can be
borrowed a week at a time. "I generally stock colorful pieces
that somehow have that 'wow' factor," Passarelli says. By renting
instead of buying, die-hard fashionistas only pay 5 percent to 10
percent of the eye-popping retail price tags of $300 to $1,000.

Passarelli took her cue from the boys. Men have been renting
tuxes for ages. Women, on the other hand, typically purchase
their formalwear outright for hundreds, sometimes thousands, of
dollars--even if the intent is to wear it once. She says even the
most basic black cocktail dress gets worn an average of two to
three times before its owner can't bear to be seen in it again.
But with the recession, consumer spending habits got a serious
makeover--especially for such luxury purchases.

Only 44 percent of affluent consumers bought personal luxuries in
2009, down 10 percent since 2006, says Pam Danziger, president of
Unity Marketing and author of Putting the Luxe Back in
Luxury. They were in good company. According to Danziger,
those who scrimp and save in every area of their life to be able
to indulge in a brand-name item also snapped their wallets shut.

Danziger has found that many of these so-called "aspirational"
shoppers are young adults 18 to 29 years old--the millennial
generation--who haven't reached affluence yet. That hasn't
stopped them from cultivating a lust for labels, thanks to
indulgent baby boomer parents. Unfortunately, millennials were
also hardest hit by the recession. Though highly educated and
digitally savvy, 37 percent of them are unemployed, the highest
rate for that group in more than three decades, according to Pew
Research Center.

What better breeding ground is there for a business rooted in
renting--rather than selling--designer clothes and accessories
than a newly minted pool of some 50 million cost-conscious
consumers well-versed in e-commerce?

Twenty-something trendsetters formed
the first test market for Jenn Hyman and Jenny Fleiss. While
the two were still students at Harvard Business School, they
put their heads together and came up with the idea of renting
special occasion dresses to women who wanted to look great--in
as many different looks as they could--on a tight budget.

After months of experimenting, and buying much of the rental
clothing with their own funds, Hyman and Fleiss debuted Rent the Runway in November of 2009.
Membership is free with registration, and dress rentals start
at $50. To add a bit of bling to that strapless frock,
accessories rentals start at $10. Less than a year after
launch, RTR boasts 450,000 members and its staff has grown to
more than 30 employees to handle demand.

Selling the concept to potential members is easy, but Hyman and
Fleiss say designers were harder to convince. Purchasing their
stock in the manner of traditional retailers, the two eventually
proved that RTR isn't taking sales away from the
designers. Rather, Hyman explains, "It creates a gateway
into retail by grooming the next generation of buyers." With a
membership base filled with millennials, RTR acts as a forum for
building brand loyalty. "This allows designers to be exposed to a
whole new set of customers," Hyman maintains, "and they'll seek
that label out when they are ready to buy something."

But 20-somethings aren't the only ones coveting the latest Chanel
or Prada item. Lloyd Lapidus and Greg Pippo had been observing
their wives, mothers and sisters raid each other's closets for
years, swapping accessories to give their outfits that extra
on-trend edge.

If it was taking place right under their noses, the experienced
entrepreneurs understood, it was happening in homes all across
America. So the two launched Avelle (formerly known as Bag, Borrow
or Steal of Sex and the City fame) in 2004, to
provide members with a virtual closet stuffed with designer
arm candy.

Customers could join for a nominal fee (immediately applied to
their first rental) and borrow bags for weeks, or months, at a
time. Avelle's rentals enabled gals hankering for the newest hobo
to hop over waiting lists for "it" bags so common at high-end
retailers. As Avelle's membership base grew, so did its
opportunity to crowdsource. CEO Michael Smith explains that by
reviewing customer comments daily, Avelle was not only able to
stay on top of certain trends, but also grow in the direction of
demand.

Currently, the site offers more than 4,000 styles of luxury
handbags, jewelry, sunglasses, watches and luggage from more than
150 designers, including Chanel and Louis Vuitton. Avelle also
extends its own cleaning and repair service to members. With
2 million members and counting, Smith maintains that Avelle has
plenty of room to grow. "People are still making sacrifices in
their daily lives. Avelle offers them a much-needed emotional
boost without the stress or commitment of ownership," he says.

Jenny Fleiss admits that the recession has helped the rental
business model, as more people pay close attention to cost per
wear. However, she says, "As the economy picks up, there are more
special events to attend. Renting will always be a smart way to
go."

As long as these startups continue to stay flexible in terms of
staff, inventory and consumer trends, they may be able to roll
with whatever the economy serves up. And as millennials continue
to reach affluence in an age of frugality, Danziger says, the
most successful companies will keep pace with shifting
perceptions of what luxury goods are worth--and if they're worth
keeping.